Corporate characteristics and leverage: evidence from Gulf countries

Abstract

Purpose This study aims to investigate the impact of corporate characteristics on leverage in the Gulf Cooperation Council (GCC) non-financial listed firms. Design/methodology/approach A sample comprising a balanced panel for eight years from 2009–2016 for four Gulf countries is used. In total, 85 non-financial listed companies have been selected using a non-probability sampling technique. Corporate characteristics are represented by return on assets (ROA), return on equity, return on capital employed, market value-added, Tobin-Q, liquidity and firm size. The study used fixed and random effect models to estimate the results. Findings The findings of the study revealed that both ROA and FSIZE have a significant negative effect on leverage. However, market value-added, return on capital employed and Tobin-Q exhibited a statistically significant positive effect on leverage. Further, the results indicated that Qatar is better than kingdom of Saudi Arabia (KSA), Oman and the UAE. In addition, evidence noted that KSA is better than both UAE and Oman in terms of the overall impact of corporate characteristics on the leverage. However, this effect is not statistically significant. Practical implications This study provides an open insight for managers, bankers, financial analysts in the GCC countries and some other developing economies by highlighting the relationship between corporate characteristics and leverage in an emerging market. Originality/value The current study provides an important insight into corporate characteristics and leverage. By so doing, it provides an attempt to identify the factors influencing corporate financing behavior taking into consideration different issues such as different proxies of firms’ profitability, market capitalization, market value added and liquidity, which provides original evidence from Gulf countries emerging markets. These countries are characterized by low tax rates and high liquidity. High liquidity may reduce the cost of borrowing and debt financing may not be a huge burden on firms’ profits. This makes the investigation of leverage and corporate characteristics, particularly, firms’ profitability and liquidity, very important. Therefore, the study tries to bridge an existing gap in the body of literature of capital structure and debt financing in Gulf countries emerging markets.

Cultural determinants of capital structure in Indonesian banking

“…The mean leverage of banks is 3.35%, reflecting the proportion of Indonesian banks' assets funded by non-deposit and deposit liabilities. The average leverage in Indonesian banks is higher than in previous studies on non-financial companies in other countries, such as Neves et al (2022); Al-Ahdal et al (2020). However, it is lower than the average for banks in other countries like Pakistan (Sheikh & Qureshi, 2017).…”

“…The financial sector, particularly banking, plays a pivotal role in economic growth and development by channeling funds within the economy (Ramadan, 2019). However, this sector's increased competition and strategic changes have led to significant transformations worldwide (Al-Ahdal et al, 2020). This study aims to evaluate the overall financial strength of different banking groups in Indonesia, addressing the existing literature gap (Wikartika & Fitriyah, 2018;Zirek et al, 2016;Zedan, 2022).…”

“…Extensive research has been conducted to understand the factors influencing a company's capital structure. Empirical studies indicate that firm characteristics, institutional arrangements, and macroeconomic uncertainty strongly influence capital structure and leverage (Khan et al, 2021;Al-Ahdal et al, 2020). The role of macroeconomic or external financial uncertainty is expected to impact a company's capital structure in various ways (Khan et al, 2021;Al-Ahdal et al, 2020).…”

“…Empirical studies indicate that firm characteristics, institutional arrangements, and macroeconomic uncertainty strongly influence capital structure and leverage (Khan et al, 2021;Al-Ahdal et al, 2020). The role of macroeconomic or external financial uncertainty is expected to impact a company's capital structure in various ways (Khan et al, 2021;Al-Ahdal et al, 2020). During crises, expected profits weaken alongside increased risks and uncertainty, making lenders hesitant to advance funds for long-term projects.…”

Financial Factors Explaining Value Migration: Evidence from Central Europe

“…Previous studies do not provide consistent results regarding the effect of leverage on firm value. Some studies indicate a positive effect (Rizqia & Sumiati, 2013;Kartikasari, Hermantno, & Mahmudah, 2019;Al-Ahdal et al, 2020), and some a negative effect (Kouki & Said, 2011;Fosu et al, 2016;Fajaria & Isnalita, 2018) of debt on firm value. This is likely due to the benefits and costs of debt, which are widely described in capital structure theory.…”